Chapter Six

Variance Analysis
Learning Outcomes
 Understand the basic logic of analysis of variance
 Calculate and interpret variances
 Record and report variances
Essential Reading :

Arora, M N., Cost and Management Accounting : Theory, Problems and Solutions,
Himalaya Publishing House

http://ebookcentral.proquest.com/lib/momp/detail.action?docID=588039

Arora, M N., Advanced Cost Accounting : Theory, Problems and Solutions, Himalaya
Publishing House

http://ebookcentral.proquest.com/lib/momp/detail.action?docID=588039

Suggested Reading :

Periasamy, P., Textbook of Financial Cost and Management Accounting, Global Media.
Definition
Cost Variance

Difference between standard and actual is known as variance. Cost variance is the

"difference between a standard cost and the comparable actual cost incurred during

a period” – CIMA, UK

Variance analysis

It is the process of analysing variances by sub-dividing the total variance in such a

way that management can assign responsibility for any off standard performance.

According to CIMA,UK, variance analysis is "the process of computing the amount of

variance and isolating the causes of variance between actual and standard."

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Favourable and Unfavourable
Variances
Where the actual cost is less than standard cost, it is known as 'favourable' or

'credit' variance.

On the other hand, where the actual cost is more than standard cost, the

difference is referred to as 'unfavourable', 'adverse' or 'debit' variance.

In other words, any variance that has a favourable effect on profit is

favourable variance and any variance which has an adverse or unfavourable

effect on profit is unfavourable variance.

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Controllable and Uncontrollable
Variances
If a variance arises due to certain factors within the control of management,
it is known as controllable variance.
A controllable variance can be regarded as the responsibility of a particular
person, with the result that his degree of efficiency can be reflected in its
size.
For example, excess usage of material is usually the responsibility of the
foreman concerned. However, if the excessive usage is due to material being
defective, the responsibility may rest with the Inspection Department for
non-detection of the defects.
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Controllable and Uncontrollable
Variances
If a variance arises due to certain factors beyond the control of management,
it is known as uncontrollable variance.
For example, change in the market prices of materials, general increase in
the labour rates, increase in the rates of power or insurance premium, etc.
are not within the control of the management of the company.
Responsibility for uncontrollable variances cannot be assigned to any person
or department.

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Types of Variances

1. Material Cost Variances

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Material Variances
1. Material Cost Variance
This is the difference between the standard cost of direct materials specified
for the output achieved and the actual cost of direct materials used.
Material Cost Variance (MCV) = Standard Cost of Material for Actual Output –

Actual Cost of Material Used

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Material Variances
2. Material Price Variance
MPV is "that portion of the material cost variance which is due to the
difference between the standard price specified and the actual price paid".
Material Price Variance = (Standard price - Actual price) x Actual quantity
MPV = (SP - AP) x AQ
3. Material Usage (or Quantity) Variance
MUV is "that portion of the material cost variance which is due to the
difference between the standard quantity specified and the actual quantity
used".
Material Usage Variance = (Standard Quantity – Actual Quantity) x Standard
price
• MUV = (SQ - AQ) x SP
• CHECK : MCV = MPV + MUV 10
Material Variances
Problem 1
The standard cost card shows the following details relating to material
needed to produce 1 Kg. of groundnut oil :-
Quantity of groundnut required 3 Kg.
Price of groundnut OMR 2.50 per Kgs.
Actual production data:
Production during the month 1,000 Kg.
Quantity of material used 3,500 Kg.
Price of groundnut OMR 3 per Kg.
Calculate:
(a) Material Cost Variance (b) Material Price Variance and (c) Material Usage
Variance.
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Material Variances
Problem 2
From the following information, calculate: (i) Material Cost Variance (MCV),
(ii) Material Price Variance (MPV) and (iii) Material Quantity
Variance (MQV)
Standard Actual
Materials Qty (Kgs) Price (RO) Qty (Kgs) Price (RO
A 10 8.00 10 7.00
B 8 6.00 9 7.00
C 4 12.00 5 11.00

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Material Variances
Problem 3
The standard material required manufacturing one unit of product X is 10 kgs
and the standard price per kg of material is 2.5RO. The cost account records,
however, reveal that 11500 kgs of materials costing 27600RO were used for
manufacturing 1000 units of product X.
You are required to calculate MCV, MPV and MUV

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Material Variances
4. Material Mix Variance
The material mix variance is defined as “that portion of the material usage
variance which is due to the difference between standard and actual
composition of materials”.
Material Mix Variance = (Revised Standard Quantity - Actual Quantity) x
Standard Price
MMV = SP x (RSQ – AQ)
RSQ = Revised Standard Quantity =
5. Material Yield Variance
Material yield variance is that portion of the material usage variance which is
due to the difference between standard yield specified and actual yield.
MYV = Standard Cost per unit X (Actual Yield – Standard Yield)
Standard Yield = 14
Material Variances

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Material Variances
Problem 4
Gemini Chemical Industries provide the following information from their
records:
For making 10 units of Gemco, the standard material requirement is:
Material Quantity Rate per kg
A 8 kgs 6.00RO
B 4 kgs 4.00RO
During April 2019, 1000 units of Gemco were produced. The actual
consumption of material is as under:
Material Quantity Rate per kg
A 750 kgs 7.00RO
B 500 kgs 5.00RO
Calculate (a) Material Cost Variance (b) Material Price Variance (c) Material
Usage Variance (d) Material Mix Variance (e) Material Yield Variance

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Material Variances
Problem 5
The standard mix to produce one unit of product is as follows:
Material A 60 units @ RO 15 per unit
Material B 80 units @ RO 20 per unit
Material C 100 units @ RO 25 per unit
During the month of April, 100 units were actually produced and consumption
was as follows:.
Material A 6400 units @ RO 17.50 per unit
Material B 9500 units @ RO 18.00 per unit
Material C 8700 units @ RO 27.50 per unit
Calculate all material variances.

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Material Variances
Problem 6
For producing one unit of a product, the material standard is
Material X: 6 Kg @ OMR 8 per Kg
Material Y: 4 Kg @ OMR 10 per Kg
In a week, 1,000 units were produced the actual consumption of materials
was
Material X: 5,900 Kg. @ OMR 9 Kg and
Material Y: 4,800 Kg @ 9.50 per Kg
Calculate all Material Variances

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Material Variances
Problem 7
80 kgs. of material A at a standard price of RO 2 per kg and 40 kgs of material B
at a standard
price of RO 5 per kg. were to be used to manufacture 100 kgs. of a product.
During a month, 70 kgs. of material A priced at RO 2.10 per kg. and 50 kgs. of
material B priced
at RO4.50 per kg. were actually used and the output of the product was 102 kgs.
Find out the material variances.

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Material Variances
Problem 8
9500 units of a product are planned to be produced using
900 kgs of Material A @ RO 15 per kg,
800 kgs of Material B @ RO 45 per kg and
200 kgs of Material C @ RO 85 per kg at a total cost of RO 66,500.
22800 units of the product were manufactured using
2,250 kgs of Material A @RO 16 per kgs,
1950 kgs of Material B @ RO 42 per kg and
550 kgs of Material C @ RO 90 per kg.
Calculate all Material Variances

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Labour Variances
1. Labour Cost Variance
This is the difference between the standard direct labour cost specified for
the activity achieved and the actual direct labour cost incurred.

Labour Cost Variance (LCV) = Standard Cost of Labour for Actual Output –
Actual Cost of Labour Used

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 Labour Variances
2. Labour Rate Variance
LRV is "that portion of the labour cost variance which is due to the difference
between the standard rate specified and the actual rate paid".
Labour Rate Variance = (Standard Rate - Actual Rate) x Actual Hours
LRV = (SR - AR) x AH
3. Labour Efficiency Variance
LEV is "that portion of the labour cost variance which is due to the difference
between labour hours specified for actual output and the actual labour hours
expended".
Labour Efficiency Variance = (Standard Hours – Actual Hours) x Standard Rate
LEV= (SH - AH) x SR
CHECK : LCV = LRV + LEV
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Labour Variances
Problem 9
For a particular Job, the data are given below:
Standard Hours 150 Hours
Standard Rate of Wages per Hour OMR 5
Actual Hours 100 Hours
Actual Rate of Wages per Hour OMR 6
Calculate Labour Cost Variance, Labour Rate Variance and Labour Efficiency
Variance

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Labour Variances
Problem 10
The following information is given :
Standard hours per unit 15
Standard rate RO 4 per hour
Actual data:
Actual production 1,000 units
Actual hours 15,300 hours
Actual rate RO 3.90 per hour
Calculate labour variances.

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Labour Variances
4. Labour Idle Time Variance
This variance represents that portion of the labour cost variance which is due
to abnormal idle time, such as time lost due to machine break-down, power
failure, strike, etc. It is calculated by valuing idle hours at standard rate.
As idle hours represent a loss, idle time variance is always unfavourable.

Labour Idle Time Variance = Abnormal Idle Time (in Hours) x Standard Rate

• CHECK : LCV = LRV + LEV + LITV

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Labour Variances
Problem 11
The following information is given :
Standard hours for manufacturing two products, M and N are 15 hours per unit
and 20 hours per unit respectively. Both products require identical kind of
labour and the standard wage rate per hour is OMR 5.
In a particular year, 10, 000 units of M and 15, 000 units of N were produced.
The total labour hours paid were 460, 000 and the actual wage bill came to
OMR 2,355,200. There was an idle time of 500 hours.
Calculate labour variances.

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Labour Variances
4. Labour Mix Variance ( Gang Composition Variance)
This variance is similar to material mix variance. It arises only when more
than one grade of workers are employed and the composition of actual grade
of workers differ from those specified.
Labour Mix Variance = (Revised Standard Hours - Actual Hours) x Standard
Rate
LMV = SR x (RSH – AH)
RSH = Revised Standard Hours =

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Labour Variances
5. Labour Yield Variance
This is quite similar to Material Yield Variance. This variance reveals the
effect on labour cost of actual output or yield being more or less than the
standard yield.
LYV = Standard Cost per unit X (Actual Yield – Standard Yield)
Standard Yield =

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Labour Variances

29
Labour Variances
Problem 12

30
Labour Variances
Problem 13
A gang of workers usually consists of 10 men, 5 women and 5 boys paid at
standard hourly rates of RO 1.25, RO 0.80 and RO 0.70 respectively. In a
normal working week of 40 hours, the gang is expected to produce 1,000 units
of output.
In a certain week, the gang consisted of 13 men, 4 women and 3 boys; actual
hourly rates being RO 1.20 RO 0.85 and RO 0.65 respectively. Two hours were
lost due to abnormal idle time and 960 units of output were produced.
Calculate appropriate labour variances.

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Labour Variances
Problem 14
A job is scheduled to be completed in 30 weeks with a labour employment of
100 skilled operatives, 40 semi-skilled operatives and 60 unskilled operatives.
The standard weekly wages of each type of operatives are - skilled RO 60,
semi-skilled RO 36 and unskilled RO 24. The work is actually completed in 32
weeks with a labour force of 80 skilled, 50 semi-skilled and 70 unskilled
operatives and the actual weekly wage rates average RO 65 for skilled, RO 40
for semi-skilled and RO 20 for unskilled labour.
Analyse the variance in the labour cost due to various reasons.

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Labour Variances
Problem 15

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Labour Variances
Problem 16

34
Variable Overhead Variances
1. Variable Overhead Cost Variance
This is the difference between absorbed variable overhead and actual
variable overhead.

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Variable Overhead Variances
2. Variable Overhead Expenditure Variance
This is also known as Spending Variance or Budget Variance. This variance
arises due to the difference between standard variable overhead allowed and
actual variable overhead incurred.

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Variable Overhead Variances
3. Variable Overhead Efficiency Variance
This variance arises due to the difference between standard hours allowed
for actual output and actual hours.

37
Variable Overhead Variances
Problem 17
Determine Variable Overhead Variances on the basis of following data:
Particulars Budgeted Actual
Variable Overhead 25000RO 26000RO
Output in Units 2500 2000
Working Hours 12500 10400

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Variable Overhead Variances
Problem 18
Calculate Variable Overhead Variance from the following data:
Particulars Standard Actual
Variable Overheads 8000RO 8500RO
Output in units 400 380
Working Hours 1200 1120

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Variable Overhead Variances
Problem 19
From the following information extracted from the books of a
manufacturing company, calculate Variable Overhead Variances.
Particulars Budgeted Actual
Production – Units 20, 000 24, 000
Variable Overheads 33, 000 OMR 39, 960 OMR
Number of working hours 25, 000 27, 000

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Fixed Overhead Variances
1. Fixed Overhead Cost Variance
It is the difference between standard fixed overhead cost for actual output
(or absorbed overhead) and actual fixed overhead.

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Fixed Overhead Variances
2. Fixed Overhead Expenditure Variance
This is also known as Spending Variance or Budget Variance. It arises due to
the difference between budgeted fixed overhead and actual fixed overhead.

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Fixed Overhead Variances
3. Fixed Overhead Volume Variance
This variance arises due to the difference between standard output and
actual output. It is defined as that portion of overhead variance which arises
due to the difference between standard cost of overhead absorbed by actual
production and the standard allowance for that output.
Fixed Overhead Volume Variance =
[Standard Rate/Unit] x (Actual Quantity - Budgeted Quantity)

CHECK

Fixed Overhead Cost Variance = FOH Expenditure Variance + FOH Volume

43
Fixed Overhead Variances
Problem 20
From the following information calculate Fixed Overhead Variances.
Particulars Budgeted Actual
Output 10,000 Units 12,000 Units
Fixed Overheads 50,000 OMR 54,000 OMR

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Fixed Overhead Variances
Problem 21
From the following data, calculate Fixed Overhead Variances:
Particulars Budgeted Actual
Output 15000 units 16000 units
Number of Working Days 25 27

Fixed Overheads 30000RO 30500RO

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Fixed Overhead Variances
Problem 22

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Contact
Information
Dr. T V V Phani Kumar
Office No. BS 047
Ext : 5216
email : [email protected]

Version No Date Approved Changes incorporated